Navigating the New Frontier: Updates to Federal Onshore Oil and Gas Leasing Rules and Regulations

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The Fluid Mineral Leases and Leasing Process rule (FMLLP),[1] which was announced by the Bureau of Land Management (BLM) on April 12, 2024, represents a significant update to the Federal onshore oil and gas leasing framework. The FMLLP is the first overhaul to the leasing program since 1988 and represents a contemporary makeover of the BLM’s oil and gas leasing program.

Per BLM, FMLLP aims to ensure “a balanced approach to public lands management” while securing “a fair return for American taxpayers,”[2] which involves updating outdated fiscal terms and “codifying new provisions from the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law (BIL).”[3] While the FMLLP largely embodies the “reform agenda delineated in the Department of the Interior’s Report on the Federal Oil and Gas Leasing Program,”[4] it also “addresses recommendations for enhancement from the Government Accountability Office (GAO) and the Department of the Interior’s Office of Inspector General.”[5]

Once the FMLLP is finalized and effective,[6] it will likely have significant implications for oil and gas companies. However, the final rule does not: (i) “change the BLM’s multiple use and sustained yield mission” and “[r]esponsible energy development will continue on public lands;” (ii) “affect any valid existing rights or currently authorized leases, except for the new bonding requirements, which have a phase-in period for existing operations;” or (iii) “affect oil and gas leasing on Tribal Lands.”[7]

Here are some key points and directives that oil and gas companies should be aware of.

  1. Leasing and Development:[8]
    • Provide clarity and consistency in the criteria used to guide the BLM’s decision-making regarding leasing, thus streamlining leasing procedures and reducing administrative burdens
    • Direct leasing and development towards areas with higher oil and gas potential
    • Avoid leasing in areas with sensitive cultural, wildlife, and recreation resources
    • Ensure lessees are financially and technically capable of responsible development as required by the Mineral Leasing Act
    • Incentivize diligent development by responsible and qualified parties
    • Limit the use of lease suspensions and drilling permit extensions
    • Strengthen oversight over lease transfers
    • Enhance protections for surface owners affected by oil and gas operations while requiring companies to collaborate more closely with landowners and address their concerns.
  1. Increased Royalty Rates:[9]
    • For new oil and gas leases, royalty rates will be increased from 12.5% to 16.67%, which means that companies will need to allocate a larger portion of their revenue to compensate the federal government.
  1. Minimum Rental Rates:[10]
    • The minimum rental rates will be increased to $3.00 per acre for the first two (2) years, then $5.00 per acre for years three (3) through eight (8), and then $15.00 per acre for the remaining years. This will likely have an impact on cost structures moving forward.
  2. Minimum Lease Bids:[11]
    • Minimum lease bids increase from $2.00 per acre to $10.00 per acre.
  1. Expression of Interest Fee:[12]
    • Establishes a new fee on expressions of interest ($5.00 per acre).
  1. Non-Competitive Leasing:[13]
    • Eliminates non-competitive leasing of Federal lands for oil and gas.
  1. Cost Recovery:[14]
    • Revisions to the onshore program’s cost recovery mechanisms to ensure that application fees reflect actual processing costs.
  1. Bonding Requirements:[15]
    • Changes to the bonding requirements are being pursued to ensure environmental protection and financial accountability, including security for reclamation and cleanup obligations. In particular, (i) increasing the minimum lease bond amount from $10,000 to $150,000; (ii) increasing the minimum statewide bond amount from $25,000 to $500,000; and (iii) eliminating nationwide and unit operator bonds.
  1. Idled Wells:[16]
    • Addresses idled wells more promptly while reducing the idle period from seven (7) years to four (4) years
    • Requires operators of nonoperational wells to help the BLM reduce its inventory of idled wells through improved identification, tracking, and proactive management.

We recommend that oil and gas companies should be proactive in implementing any necessary changes, in order to overcome challenges and be ready to capitalize on opportunities that may result when these rule changes are implemented and set the organization up for long-term success.

References

[1] The unpublished rule can be found here: 2024-08138.pdf (federalregister.gov). It is scheduled to be published on April 23, 2024, which can then be accessed here: Federal Register: Public Inspection: Fluid Mineral Leases and Leasing Process.

[2] BLM-Final-Onshore-Oil-and-Gas-Leasing-Rule-General-Fact-sheet.pdf

[3] Id.

[4] Report on the Federal Oil and Gas Leasing Program

[5] BLM-Final-Onshore-Oil-and-Gas-Leasing-Rule-General-Fact-sheet.pdf

[6] The final rule is informed by public comment and feedback received during a 60-day public comment period on the BLM’s proposed rule. The final rule will come into effect 60 days after it is published in the Federal Register.

[7] Id.

[8] BLM-Final-Onshore-Oil-and-Gas-Leasing-Rule-General-Fact-sheet.pdf

[9] Id.

[10] Id.

[11] Id.

[12] Id

[13] Id.

[14] Id.

[15] Id.

[16] Id.

Andrew represents companies active in the oil and gas industry in both litigation and arbitration matters, from risk management to trial. He also advises clients on compliance and regulatory issues and handles proceedings in front of administrative agencies / governmental bodies, including the Ohio Department of Natural Resources and the Ohio Department of Commerce.

In addition to his energy practice, Andrew has broad experience in commercial and business litigation, including breach of contract / lease claims, construction disputes, non-compete / non-solicitation disputes, trade secrets, business torts, and real property-related claims. He is OSHA certified in Construction Safety and Health and has drafted and reviewed numerous construction contracts.

Josh advises on title opinions, division order title opinions, and all aspects of complex upstream oil and gas and minerals transactions, including purchase and sale agreements and due diligence.

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